This presentation is an amalgamation of the speech and presentation given at the 5th Thai Ports and Shipping Summit, held on 29th October, 2009 in Bangkok. It is intended as an overview of the driving dynamic behind the growth of inter-Asian trade and the potential for regional trade cohesion to insulate the region from future global shocks.

1. China Intelligence Online Informing business in China www.chinaintelligenceonline.com www.chinaintelligenceonline.com

2. With financial packages being implemented across the region, and recent talks in Bangkok between the ASEAN+3 nations confirming that the China ASEAN free trade zone is still on track, some are hoping growth in inter-Asian trade will help the industry on the road to recovery and insulate it in future from further global shocks. To see whether this is possible, let’s first look at the current impact of the downturn on the market in Asia. The financial crisis that hit the world economy in the second half of 2008 has been particularly hard felt in the Asian container port market as the forces driving export led growth dwindled. Ports across the entire region were hit hard, not least of course in China, with many container ports reporting significant falls in throughput in the first six months of this year. www.chinaintelligenceonline.com

3. Top 8 Ports’ Container Throughput, March and January to March, 2009 www.chinaintelligenceonline.com

4. In Shenzhen, the gateway to China’s Pearl River Delta, growth figures have been surprisingly bad; with TEU throughput for the first six months of this year down 21 percent over the same period last year. Whilst the Pearl River Delta region has been hit hardest in China, no region has been spared. In the Yangtze River Delta, throughput at Shanghai Port contracted 15 percent compared with the first half of 2008; while Guangzhou and Xiamen both lost 14 percent over the same period the previous year. Some estimates indicate shipments to North America from the Pearl River Delta have declined by as much as forty percent in certain ports and the decline in sectors such as toys and textiles, as high as seventy percent. www.chinaintelligenceonline.com

5. Top 10 Ports’ Container Throughput, June and June to January 2009 www.chinaintelligenceonline.com

6. According to Chinese government sources, the State Council currently forecasts the effects of this decline will likely continue to drive a period of consolidation among port operators and global shipping lines across the region as a whole. Current estimates from China’s Ministry of Communications indicate the government expects the container market in Asia will most likely maintain this downturn throughout 2009 and on into third quarter of 2010. For shipping lines, the current quarter, traditionally the peak demand season, will probably signal a period of limited recovery, however, the Chinese government is expecting profit forecasts for COSCO, CSCL and other major Chinese shipping lines to also remain negative until at least well in to 2010. www.chinaintelligenceonline.com

7. Vietnam growth rates of merchandise exports (% of previous year) www.chinaintelligenceonline.com

8. Looking at the global picture, what the current downturn has highlighted is that much of the growth of the Asian container market, driven by spending in the major consumer blocks - the US, the EU25 and Japan (or G3) – has passed a point of sustainability. Namely, that a sizable proportion of the growth over the last decade or so was built on the back of a shaky financial model that many countries may be unable, or unwilling to return to. Namely, growth based on spending borrowed against property prices. www.chinaintelligenceonline.com

9. The G3 The driving force in Asian container growth over the past three decades US EU 25 Japan www.chinaintelligenceonline.com

10. So, while most of the structural issues that ultimately led to the banking failure last year have yet to be fully addressed, some are now predicting that a sustained recovery may see a significantly different financial landscape emerge as a result. So the major question is, will the current downturn lead to a structural change in the spending habits of the worlds three largest consumer blocks, the G3? And if so, how can this structural change be mitigated? The current drop in inter-regional trade, and the massive stimulus packages announced by some countries in the Asia region, has prompted some to pin their hopes in the longer term, on domestic demand and the growth of intra-Asian trade to bring the industry back to health. The question is; can inter-Asian trade insulate the region against downturns on the global stage? www.chinaintelligenceonline.com

11. Asian Exports by Destination 1985 www.chinaintelligenceonline.com

12. In this respect, in general, the Asian region has undergone a significant period of expansion. In particular, since the 1990s, growth in the intra-Asian market has been remarkable. Accompanying this expansion of trade has been a tremendous growth of investment and financial linkages between countries in the region. This growth has been seen by some as evidence that Asian nations are strengthening regional economic ties and decoupling themselves from dependence on the G3. www.chinaintelligenceonline.com

13. Asian Exports by Destination2005 www.chinaintelligenceonline.com

14. The general liberalisation of Asia’s trading environment has led to a broad diversification of its export base. In addition to this, there has been a rapid growth in intra-Asian trade, as exports destined for other Asian nations rose from 26.2 percent in 1985 to 37.3 percent in 2005. The overall general dynamic of this shift has appeared on the surface to diminish the importance of the region’s single largest trading partner, the United States, over the twenty-year period, from 23.2 percent in 1985 to 17.6 percent in 2005. Japan and the EU-25 now account for 25.8 percent of Asia's total export market, much larger than the US share. Furthermore, taken together, the G3 economies account for only 43.3 percent of Asia's total exports, down from 53.2 percent in 1985. www.chinaintelligenceonline.com

15. On the surface, this geographic diversification seems to imply that the economies of Asia should in the future be better insulated against external demand shock originating from the G3 economies by creating the capacity for mitigating growth in regional non-G3 Asian markets. However, according to research by the ADB, despite the growth in inter-Asian trade the region’s dependence on the G3 remains very strong. Export to GDP ratio has continued its upward trend reaching almost 55 percent of GDP in 2005 compared with a global average of 28.5. In terms of incremental export-to-GDP ratio, measured year-on-year, we have also witnessed an upward trend which indicates the increasing importance of the export sector as an engine of growth across the region as a whole. According to data from the Asian Development Bank (ADB), the US accounts for almost 50 percent of the total G3 non-oil imports and there is a strong correlation between non-oil import trends between all three G3 regions. www.chinaintelligenceonline.com

16. The correlation between growth in G3 non-oil imports and Asian export growth This correlation has risen significantly from a 0.2 decadal average in the 1980s To a 0.8 correlation on average for the first seven years of the twenty first century www.chinaintelligenceonline.com

17. Furthermore, whilst the percentage share of Asian exports destined for the G3 has consistently fallen over the period 1980-2008, the correlation between growth in G3 non-oil imports and Asian export growth has in fact risen significantly from a 0.2 decadal average correlation in the 1980s, to a 0.8 correlation on average for the first seven years of the twenty first century. Despite the G3’s decreasing share of Asian exports as a whole, the increasing correlation between these two factors is due in large part to the emergence of new dynamic driving inter-Asia trade. Namely, the vertical integration of production processes spread geographically across the Asia region whose final products are destined for countries outside the Asia region. In short, much of the growth in inter-Asia trade has been in intermediate products shipped from one country to another for processing or assembly. www.chinaintelligenceonline.com

18. Indeed analysis based data from the Global Trade Analysis Project database confirms in decomposition more than 70 percent of intra-Asia trade consists of intermediate goods used in the production cycle, and of this half is driven by demand outside the Asia region. Consequently, around 61.3 percent of total Asian exports in terms of finished goods are consumed in G3 countries. Within Asia, the PRC is the largest driver of regional exports, but its final demand accounts for only 6.4 percent of total Asian trade, which was only half the contribution from Japan and slightly below a quarter of the US. The results show us that the G3 economies are still the main ultimate export destinations for finished goods leaving Asia, when taking into account the share of intermediate goods trade that are for assembly and production within the region, but that is eventually shipped out of the region. Based on these data, CIO estimates that of the total volume of finished goods leaving Asian countries as exports, around 20 percent are destined for Asian markets with around 60 percent absorbed by G3 countries and the remainder headed for the rest of the world. Given the demonstrated dependence of Asian economies on G3 consumers the current financial crisis is likely to have a sustained, and significant impact on economic, and trade growth in the region for at least the next year. www.chinaintelligenceonline.com

19. Global Trade Analysis Project database Confirms more than 70 percent of intra-Asia trade consists of intermediate goods used in the production cycle Of this, half is driven by demand outside the Asia region Around 61.3 percent of total Asian exports of finished goods are consumed in G3 countries www.chinaintelligenceonline.com

20. In conclusion, then, despite the growth of inter-Asian trade over the past three decades the Asia-Pacific region remains perhaps more closely tied than ever before to the global economy. If the longer term effects of the economic downturn, i.e. a structural shift in the spending patterns of the G3 does emerge as an outcome of recent events, there remains a great deal of work to be done to stimulate domestic demand in order to mitigate potential downturns in future. Whilst measures like the China-ASEAN free trade agreement and recent discussions between ASEAN+3 may go some way to insulating the region, it is unlikely to completely decouple the region in the shorter terms view. Thank you. www.chinaintelligenceonline.com

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